Clubbing of Income

What and when is the concept of Clubbing of Income in India attracted for the purposes of taxation under the Act?

Ans.

The concept of clubbing gets attracted in case of Assets transferred by way of -

i. Gift by an individual (Donor) to his/her spouse (Recipient)

ii. Gift by Parents (Donor) to Minor Child or Grandchildren or Daughter-in-law (Recipient)      

Upon such assets transferred, as per the concept of Clubbing of Income, any income earned by the Recipient from the said Assets gifted by the Donor shall be clubbed in the income of the Donor. 

Further, any income of minor is subject to tax in hands of parents, except when the minor earns income as Artists having Special Skills or by doing Manual Work or in case minor being Differently Abled.

A NRI has four minor children consisting of 2 daughters and 2 sons. The annual income of 2 daughters is Rs. 9,000 and Rs. 4,500 and of sons is Rs. 6,200 and Rs. 4,300 respectively. The daughter who has income of Rs. 4,500 was suffering from disability in the nature specified u/s 80U (viz. blindness, low vision, hearing impairment, autism, cerebral palsy, mental retardation, etc.). How and what amount of income shall be clubbed?

Ans.

As per the provisions of the Act, all income accruing or arising to a minor child shall be included in the Income of the said minor’s mother or father, whosevers, parent income is higher. However, income of a minor child suffering from disability specified in the nature referred u/s 80U would not be included in the income of the parent, but would be taxable in the hands of minor child. Further, income of each minor child includible in the hands of the parent would be exempt to the extent of
Rs. 1,500/- each. Accordingly, in present case, income of minor child needs to be clubbed as under:

 

Sr. No.

Particulars

Amount (Rs.)

1

Income of one daughter

Less: Income exempt

 

Total (A)

9,000

(1,500)

                  

7,500

 

2

Income of 2 sons (4300+6200)

Less: Income exempt (1500+1500)

 

Total (B)

10,500

(3,000)

 


7,500

 

 

Total income to be clubbed (A+B)

 

15,000

In the above example, Will the above answer differ in case if the sons have earned the income from their own skills and talent?

Ans. Yes, the answer will differ. The income shall be taxed in the hands of the minor sons as they have earned the income through application of their own skills and talent.

A NRI has given a bungalow owned by him on rent. Annual rent of the bungalow is Rs. 84,000. NRI transferred entire rental income to his friend Mr. A. However, he did not transfer the bungalow. In whose hands will the rental income be taxed?

Ans. In this situation, rent of Rs. 84,000 will be taxed in the hands of NRI. This is the case of transfer of income (rent) without transfer of asset (bungalow).

Mr. A, being a father had purchased a property in Mumbai ten years ago jointly with his minor son and sold the same in 2015 earning capital gains of Rs. 10 lacs. His son’s age was 16 at the time of sale of the property. In whose hands will the capital gains be taxed?

Ans. The capital gains will be taxable in the hands of Mr. A, father (assuming income of Mrs. A is less than that of Mr. A), as per the clubbing provisions under the Act. As son is a minor, any income accruing to the minor will be clubbed in the hands of the parent.

Mr. A, husband has gifted an amount of Rs. 1 lac to his wife on the occasion of her birthday. Wife has booked a FD in her name out of such funds. What will be the tax treatment of such interest received by wife?

Ans. Such interest received by wife will be taxed in the hands of husband as per the clubbing provisions under the Act.

Will the above answer differ in case wife has invested money out of gift received from her father?

Ans. Yes, the answer will differ and the interest income will be taxable in wife’s hands only and will not be clubbed in the hands of the father.

A husband has bought a house property jointly with his wife in the ratio 50:50 and now intends to sell it. How will the capital gains arising on sale of such property be taxed?

Ans. The capital gains will be taxed in the hands of husband alone, unless he is able to substantiate that the share of 50% of his wife in the property is bought by her out of her own earned funds. In case the property is bought out of funds gifted by a husband to his wife, income will continue to be clubbed in the hands of husband.

Can remuneration received by spouse of an individual be clubbed with his/her income?

Ans.

Remuneration received by the spouse of an individual from a concern in which the individual is having substantial interest is clubbed in the income of the individual. 
The provisions in this regard are as follows:
1. The individual is having substantial interest in a concern;
2. Spouse of the individual is employed in the concern in which the individual is  having substantial interest; and
3. The spouse of the individual is employed without his/her technical or professional knowledge or experience.